Treasury plans NIS 21b budget cut

The Finance Ministry wants to cut spending on defense, welfare, and public sector salaries.

Cuts in the upcoming state budget could reach NIS 21 billion, and the government is again likely to miss the deficit target without adjustments on the revenues side, according to the Ministry of Finance's first draft of the economic plan, which will be submitted to the Prime Minister's Office within a week. The draft was written by the ministry's Budget Department and other units over the past six months, as the Budget Department prepares to submit a budget by August.

The plan's goal is to create growth while narrowing gaps. It has three main pillars: keeping the fiscal framework, including the spending and deficit targets; budget items which support the targets; and structural reforms to support the long-term targets. The plan's first and immediate objective is to keep the fiscal framework, including the spending cap.

Since the budget will only be approved in mid-2013 at the earliest, Budget Director Gal Hershkowitz has taken the strategic decision to consolidate the 2013-14 budgets, with cuts planned for the full year of 2014, from which the cuts in 2013 will be derived.

The 2013 budget can grow by no more than NIS 12 billion and the 2014 budget can grow by no more than NIS 9 billion, for a total growth of NIS 21 billion (before spending). However, Ministry of Finance calculations show current commitments at NIS 40 billion, which means that the budget base for 2013-14 must be cut by NIS 20 billion.

Targets: Defense, welfare, and pay hikes

Under the Ministry of Finance's plan, half of the planned cut is marked by categories, and half will be submitted after a meticulous examination of every budget item of the NIS 340 billion budget.

As "Globes" reported in August 2012, the budget cut targets three areas: defense, the children's allowance, and pay hikes promised to various workers committee and the Histadrut (General Federation of Labor in Israel). The Ministry of Finance will again try to implement the Trajtenberg Report and restore the defense budget to its 2011 level. The 2012 defense budget was originally NIS 50.5 billion, but rose to NIS 56 billion, not including supplements added during the fiscal year. The ministry wants to reduce the defense budget to NIS 48.5 billion, in line with the Trajtenberg Committee recommendations, which will save NIS 3-4 billion.

The Ministry of Finance knows that any cut will be considered an achievement, and that the decision will be made by the cabinet, on the basis of priorities. There seems to be little chance of achieving this reduction, given the security challenges, and it greatly depends on who the next defense minister will be.

The Ministry of Finance also wants to cut the children's allowance by a further NIS 3-4 billion, to be achieved in two ways: cancelling the differentiation between children, on the basis of an equal allowance for each child; and a reduction in the uniform allowance for each child. There is a good chance of achieving this, but only if a government is formed and it contains no haredi (ultra-orthodox) parties.

The third, and largest, source for the budget cut is the pay hikes for public sector employees - NIS 14 billion, according to Ministry of Finance calculations. The ministry plans to reduce the pay hikes to NIS 10 billion, for a savings of NIS 4 billion. It will also seek a two-year pay freeze, as it believes that the public sector has benefited from hefty pay hikes, while private sector salaries have eroded. Furthermore, public sector employees enjoy tenure, a right that does not exist in the business sector, which has been affected by the global crisis.

In addition to the targeted budget cuts, there will also be another kind of cut. First, the Ministry of Finance has taken the strategic decision to end across-the-board (flat) cuts. Non-thematic cuts will be made on the basis of a review of all budget items.

"The harsh budget is an opportunity for us to review the entire budget and all its fat," said a senior Ministry of Finance official. NIS 10 billion will be saved through streamlining, postponing or terminating projects that do not serve the objectives of growth or narrowing gaps, reducing items which have grown, postponing transportation and other public infrastructure projects, and turning budget projects over to the private sector as BOT and PFI projects. "We've already found NIS 10 billion," said the official, adding that postponing and transferring BOT projects alone will save NIS 2 billion.

Saving the 3% deficit target

The deficit target is 3% for 2013 and 2.75% for 2014. The full picture will only emerge when the final forecasts are drawn up, but the Ministry of Finance already admits that the targets will be overshot. Part of the difference has already been closed by the mid-2012 fiscal package, which means that the ministry has two alternatives: larger cuts on the spending side; or more revenues.

Since the Ministry of Finance rules out cutting the budget by more than NIS 20 billion, this means either tax hikes - its less preferred option because this would harm growth and equality, or broadening the tax base. The ministry is targeting VAT, which would generate NIS 4 billion a year, and the individual income tax, which would generate NIS 3 billion. The ministry prefers to broaden the taxpayer base by eliminating tax exemptions and distortions. It will submit to the government the harm to growth and the tax distribution of each and every exemption by percentile.

Published by Globes [online], Israel business news - www.globes-online.com - on February 5, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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